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Edited Transcript of TRE earnings conference call or presentation 31-Jul-19 2:00pm GMT

Half Year 2019 Tecnicas Reunidas SA Earnings Call

Madrid Aug 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Tecnicas Reunidas SA earnings conference call or presentation Wednesday, July 31, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Eduardo San Miguel Gonzalez De Heredia

Técnicas Reunidas, S.A. - CFO

* Juan Lladó Arburúa

Técnicas Reunidas, S.A. - First Vice Chairman of the Board

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Conference Call Participants

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* Alvaro Lenze Julia

Alantra Equities Sociedad de Valores, S.A., Research Division - Research Analyst

* James Thompson

JP Morgan Chase & Co, Research Division - Analyst

* Kevin Roger

Kepler Cheuvreux, Research Division - Research Analyst

* Lillian Starke

Morgan Stanley, Research Division - Research Associate

* Luis de Toledo

BBVA Research SA - Chief Analyst of Oil and Materials

* Michael Brennan Pickup

Barclays Bank PLC, Research Division - MD & Senior European Oilfield Services Analyst

* Nuno Estácio

Haitong Bank S.A., Research Division - Equity Research Analyst

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Presentation

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Eduardo San Miguel Gonzalez De Heredia, Técnicas Reunidas, S.A. - CFO [1]

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Hello. Good afternoon. This is Eduardo San Miguel. Welcome to this first half 2019 results presentation that will be conducted, as always, by Mr. Juan Lladó, CEO of the group. It will take something like 20 minutes, and you can pose your questions after the speech.

And now I give the floor to Mr. Juan Lladó.

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Juan Lladó Arburúa, Técnicas Reunidas, S.A. - First Vice Chairman of the Board [2]

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Hello. Sometimes, Eduardo says 15 minutes, sometimes he says 20. So hopefully -- I mean I would have liked if he said 15. I'm going to try to make it in 15 minutes so there is more space and room for questions and answers.

We'll talk really quick about the awards. I think it makes some sense to make a quick review of the awards we have had over the past months. A quick review of the backlog, it should be simple. Pipeline is strong and it should not be very difficult. We've been creative with, I think, with a very good slight, which has to do with the quality of delivery, which is the base of the awards of our present and future success, numbers and outlook. I think very recently, although it was -- a lot of people thought that it was going to be awarded or was going to be awarded, but it took a while to get signed.

We signed just a few weeks ago, the 2 very large projects for Saudi Aramco. These 2 very large projects have to do with gas, have to do with a very important Marjan upstream field and we're extremely proud of it. We're extremely proud of it as it gives a message to our competitors that we're good and to the market that we are very good. The -- maybe a message here when we talk about gas, as we've seen over the last 2 years, a lot of investment in gas. And we're going to see a lot of investment in the gas in the Middle East more so in the very near future.

If you look back on TR, TR was not very strong on gas and upstream, in particular, about 15 years ago. And today, we're one of the best, and we are delivering one of the largest and most sophisticated projects onshore gas treatment plants. So what we place in TR, which is our ambition, as a very strong and I'd like to underline the very strong upstream onshore company.

And if you put it all together our know how, a very onshore specialized company, upstream and downstream, and that's the quality of -- which is being reflected by the quality of the job and the quality of the jobs that we have delivered over the last 12 months. It's very important because it really bases our success in this very near future, which is up to come.

Let's make a quick review on awards. And I think if we want to talk about market recovery and TR's recovery, we cannot talk about the last 6 months, let's talk about the last 10 months. Let's be a bit more generous on the cut and just talk about the last 6 months. It's very important on upstream oil and gas. When I say oil and gas, Adgas is oil, Bu Hasa is gas, that we have been awarded very important projects in the Middle East by ADNOC, Marjan, by Saudi Aramco and again by ADNOC and Exxon a very large FEED -- a very complex FEED on a very important oil offshore field, which is important. I mean they are quality awards.

Refining. The Singapore refining project by Exxon, after having worked with them for almost a year, developing a competitive FEED, I think it's a sign of quality and success. And having been selected in competition with another 3 companies, which I don't think I'll have to name, that have been selected by YPF on the refining investments, I guess is a sign of quality and know-how.

Petrochemicals, I was talking before, have been strong, as an onshore, very strong integrated house. We have been awarded 2 FEEDs, one for ADNOC and CEPSA and another for SOCAR and BP in Turkey.

And in Power and Water, Sumitomo/GE award us a big job and we've been selected on an undisclosed customer yet in Mexico. So the message is good. There has been 10 months of market recovery and 10 months of TR winning very important jobs. And they are the good guys of the class, these guys who trust -- put their trust on TR.

Backlog. Okay, let's make a quick review of the backlog. Today, we've done the year-to-date as we want to include the last contract signed, which is the Marjan, the up -- that's the reality on the business. We have EUR 11.5 billion of backlog, which compares to EUR 9 billion a year ago, which is -- and if you analyze where we were a year ago, we had a different -- definitely, we had a different backlog that we had expected. We were waiting for the substantial signs of market recovery, which means refining and gas in Singapore and, obviously, in Saudi Arabia.

So our integrated onshore strategy is more than proved, which is where we are and not integrated onshore strategy. I think we've been perceived in terms of know-how, in terms of delivery, in terms of quality of engineering of one of the best.

If you see a split by product, I mean, you see it looks almost as a coincidence as 48% is oil line and gas upstream and 48% is downstream. Power and water is just a little small thing that 1 year after another helps our business a little bit. It's never going to make us rich.

Pipeline. We've been talking about pipeline. I mean pipeline means nothing until you get awards. Otherwise, it's just fancy numbers and fancy presentations. But what I want to see or our engineers want to see and definitely what investors want to see are real awards. And those awards have taken place. Those awards will take place for sure. And today, after the recent awards, we maintain a very strong pipeline of EUR 41 billion (sic) [$41 billion.]

This pipeline, you have to take into account that it's not future investments that our customers are planning to have. This is actual bidding, actual getting ready to bid or invited to bid by customers. I mean this is the closest thing to reality. And we have been proving to the market that pipeline -- TR's franchise converts pipeline into awards and converts awards into a very good, very healthy and very high-quality delivery.

If we want to further up a little bit or dig a little more deep into the $41 billion of awards -- I mean not awards, I'm sorry, pipeline. Usually, we never talk that much of pipeline, but here we're talking about how that recovery would translate into TR business. What we see is the pipeline, where we're bidding almost 50% is in the Middle East, we're very strong, we're strong and we know how to manage the market. 20% is Europe, take into account that Europe is Russia and Europe also is Turkey. And other smaller jobs in Eastern and North Europe that we work -- that we're bidding. Actually, Latin America is always there. You cannot -- Latin America is always a chunky place, probably just go back and forth, but it's there and we have a strong presence and we have a good leverage there.

And the rest of the world, the blue, sometimes it gets very big and it's very big because it's Asia Pacific. Some of you people who do not know, I've asked very often what the hell are you doing in Asia Pacific, that's too far from you. And people forget that we have very successfully delivered a very large job, extremely successful for PETRONAS, a very important customer of us, and very recently we've been awarded a very big job for Exxon. So we're there. We're there to compete, we're there to deliver and we are there to bid and win projects. And the investments that are taking place there are very good -- are big.

And the split of products, obviously, is in all of it where we're good at. We're good at petrochemicals. Let me tell you, we were not as strong 20 years ago, but we have improved drastically over the last 15 years. And there is no doubt, we're one of the best in refining. And as I said before, there is very little doubt that on onshore gas and oil, and more so gas, again today with the jobs we have already delivered and they're up and running, we're one of the best. So the market is there, the pipeline is there, and I'm very comfortable that it's going to be a dynamic pipeline converting into backlog in the next 18 months.

And quality of delivery. Here, we put up a creative, let's call it, creative slide and here is -- when I talk about we are delivering -- well, we're delivering with the recent -- our backlog is -- it's a difficult backlog because we have a lot of jobs under construction that have to be delivered. How do I prove that to you? By percentage of completion and whatever. And we thought that it will be, if you want to compare 2015 to 2018 and 2019 and forward and it's -- I mean the number is where are the millions of hours under construction. I mean how many men are working for TR on construction? Who are the subcontractors? I mean everyone are being subcontracted through companies as we don't have any blue collar work in TR -- working for TR to deliver the big jobs that were awarded to us in 2013 and 2014 and 2015.

I mean if in 2015, 73 million hours of construction is equivalent of 14,000 workers a year. I mean when we are saying to you that we are delivering a lot of jobs and we have to maintain the quality, the safety of the jobs and deliver within closer to schedule we can in 2018, that means 196 million hours of construction, which translates, and this one is impressive, into 100 -- more than 100,000 workers a year. And we've done that without sacrificing -- we've never sacrificed to the customer quality of delivery. And the best proof to that is those customers in the Middle East have come back to us with new jobs. So the quality of delivery, which is the base of our future success in a recovery market, I think, is more than proved.

And then, let's go to financial results. The financial results, and I'd go to straight, sales still is slightly lower despite the increase of the last quarter that is slightly lower than what we had a year ago, and that has to do with our still -- with our balance backlog. And our net margins is still low, 1.2%. It is very much related to the presentation -- I mean to the slide before. I mean a very large percentage of our business, a very large, huge, has to do with projects being delivered, projects under construction, more than 100,000 workers been finalized about $14 billion to $13 billion of jobs in the Middle East, most of them, some of them in Turkey. In Malaysia, we're doing the [guarantee proving] and delivering big jobs for Saudi Aramco for Kuwait and for ADNOC. All of them counting on TR for future jobs.

So the -- as we recover with the new jobs -- as we recover with the new award, this 1.2% margin, this EUR 27.4 million EBIT will have to increase. And it will increase very much in line with the guidance we've already given to you. So as I said here, we're in line with company guidance and the imbalanced backlog, as I explained before, is -- will show -- will translate in recovery, a progressive margin recovery.

Net cash position, $250 million (sic) [EUR 250 million.] Market has been tough. There is a lot of cash out when you deliver jobs, a lot of cash out. I mean you cannot get your money and not pay the contractors. You cannot delay payments to the subcontractors. You cannot delay payments to the workers. The workers have to deliver, and we have to deliver to our customers. But despite this big chunk of job under construction, we have maintained a decent $250 million (sic) [EUR 250 million] of stable net cash position, which I consider a good management of our business.

And with all of that, let me finalize with the outlook. Sometimes I've said that I was modestly confident. Today, I have to say that I'm highly confident about the future. And it's true that I am. We have a fresh backlog. And we don't have a fresh backlog because we have been lucky with one job. We have a fresh backlog of $11.5 billion because we're good, as simple as that. We are delivering nicely to our customers despite the level of difficulty, despite the crisis, despite the poor quality of the suppliers because crisis has affected everyone. Despite of the poor quality sometimes of our subcontractors because crisis has affected them as well, we're delivering jobs, and I'm happy to say that customers are paying back with new jobs once the market has recovered. That makes me feel highly confident about the future.

And I go to the third point, I mean, highly confident because we have pride and trust. And we have pride and trust in our franchise, we have product, we're going to be successful. And we're going to be successful because the market recovery is not going to be a market in one specific area and a specific product. We've seen a recovery in our products, all geographies and with a much faster conversion into awards that we have ever seen. So these 2 points, which at the end of the day, is highly confident because of market recovery and customer trust. With these 3 messages, I'm sorry, I'd just want to finalize my presentation and answer any questions you may want to post. Thank you very much.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Mick Pickup from Barclays.

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Michael Brennan Pickup, Barclays Bank PLC, Research Division - MD & Senior European Oilfield Services Analyst [2]

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A couple of questions, if I may. You talk about this number of man hours in construction. If I look at your order book into next year, it's a lot younger backlog. Can you just talk how you think your construction hours are going to progress into next year? Clearly, I think there's less risk, if you're not in construction from an investment view point. So if you can just talk about how you expect it to come down? Or where you expect it to go to next year is the first question.

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Juan Lladó Arburúa, Técnicas Reunidas, S.A. - First Vice Chairman of the Board [3]

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I think for next year we expect to come down by 30%, give or take.

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Michael Brennan Pickup, Barclays Bank PLC, Research Division - MD & Senior European Oilfield Services Analyst [4]

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You've said, give or take. Magic. That's...

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Juan Lladó Arburúa, Técnicas Reunidas, S.A. - First Vice Chairman of the Board [5]

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I don't know if that answers it.

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Michael Brennan Pickup, Barclays Bank PLC, Research Division - MD & Senior European Oilfield Services Analyst [6]

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Yes. And then the other one is, of the big projects are out there. What have you got left to complete into next year? So I know that you're finishing off a lot of jobs at the moment. I think it's about EUR 13 billions' worth, I think, this year, from my calculation. I'm just wondering what you've got left to finalize in 2020? Or is it all off the books this year?

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Juan Lladó Arburúa, Técnicas Reunidas, S.A. - First Vice Chairman of the Board [7]

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I mean, in many of them, we're doing the last, I think, we call, loops, I mean, controlled loops. Punch lists are finished. We're delivering systems, but if any takes long because we have to start up the job. So it may take 3, 4, 5 months, I'm talking Saudi Arabia, the big 2 jobs in Saudi Arabia. And it take very few months. I mean, I think, we'll -- in theory, we should get -- have practically 0 left for next year. We'll have to be working with a customer on the stabilize and do the whole warranty test and start-up of the plant. But construction-wise, it's done -- no, it will be done.

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Michael Brennan Pickup, Barclays Bank PLC, Research Division - MD & Senior European Oilfield Services Analyst [8]

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Perfect. And then just looking forward, obviously, your bidding pipelines come down or it comes down because you've won a lot, which is always the best answer. But can you just talk about that bidding pipeline and how much of that actually is in bid or in tendering phase at the moment? Obviously, some of your competitors give a breakout, and a lot of it is in the prospective category. I'm just wondering how tenable that $41 billion is.

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Juan Lladó Arburúa, Técnicas Reunidas, S.A. - First Vice Chairman of the Board [9]

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I mean the number is big. If I said to you, you're going to be drive me crazy, asking me how much of the bidding pipeline is going to translate into backlog. But the number...

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Michael Brennan Pickup, Barclays Bank PLC, Research Division - MD & Senior European Oilfield Services Analyst [10]

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No, that's not me.

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Juan Lladó Arburúa, Técnicas Reunidas, S.A. - First Vice Chairman of the Board [11]

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The number I'm going to give it to you is 70%, it's about from a $25 billion to $30 billion we are bidding. I mean so some of them already bid, others will use bidding to bid. We're going to be bidding. We're going to be presenting the bids within the next month. And all that together is about 30%, which is from EUR 25 billion to EUR 30 billion and the others are prospects. And when I say prospects, it means customers are asking us or inviting us to bid, but we're not getting ready to bid.

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Operator [12]

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Your next question comes from James Thompson from JPMorgan.

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James Thompson, JP Morgan Chase & Co, Research Division - Analyst [13]

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A couple of related ones, if I may. Juan, when I look at consensus for 2019, it's looking for EBIT of EUR 116 million. At this point in time, obviously, delivered 27% in the first half. I just wondered, in terms of that kind of margin improvement you've obviously been talking about for some time, how confident you are that you can deliver the bridge to get to the full year '19 number in the second half of 2019? And just in terms of the granularity, do you really see this is a Q4 event or is 3 going to provide -- 3Q going to provide some assistance as well? And just a second question in terms of '20 -- in terms of the second quarter, sorry, it looked like power had a larger impact on numbers than perhaps we were expecting. Clearly, revenues are stepping down quite materially in that part of the business at this point in time. How does that evolve through the rest of the year? Is there a risk that the current power can drag on your reported numbers in the second half of 2019?

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Juan Lladó Arburúa, Técnicas Reunidas, S.A. - First Vice Chairman of the Board [14]

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Okay. I'm a little confused with the numbers you put on guidance. The guidance we have given to the market, I'm very confident. I'm very confident that, that guidance, we're going to be very close to it, we're going to make it.

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James Thompson, JP Morgan Chase & Co, Research Division - Analyst [15]

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So I mean you talk about guidance in terms of revenue and hitting a 4% margin at the end of the year, but I think consensus or at least playing by consensus numbers on EBIT at this point in time, EUR 116 million, that's EUR 90 million of EBIT...

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Juan Lladó Arburúa, Técnicas Reunidas, S.A. - First Vice Chairman of the Board [16]

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I don't know that about -- I mean the guidance says that we're going to reach margins of 4% at the end of the year, but that doesn't mean that we're going to get 4% for the whole year. I mean, obviously, we're at 1.2% first half of the year. And if we want to move into the 4% towards next year, we have to be reaching those 4% at the end of the year, and that's what I feel comfortable on.

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James Thompson, JP Morgan Chase & Co, Research Division - Analyst [17]

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Okay. Okay. That's clear.

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Juan Lladó Arburúa, Técnicas Reunidas, S.A. - First Vice Chairman of the Board [18]

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And Power, I don't think it shows a trend. It's just a quarter cut and it's a quarter cut on projects that like always is under -- many of those projects is under construction, some other are starting, but I don't think it's showing a trend and I don't think it's going to drag TR's -- this is a small business and it definitely is not going to drag TR margins over the year.

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Operator [19]

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The next question comes from Lillian Starke from Morgan Stanley.

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Lillian Starke, Morgan Stanley, Research Division - Research Associate [20]

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The first question I had is, just looking at sort of the slides that you had from your past presentations on how is your backlog made up in terms of what's in engineering, construction, procurement, I mean -- and the color that you've given in terms of how many hours you have under construction. I was just wondering, if you can give us a bit of detail of how should we expect the margins to move through that process because I imagine the engineering and procurement phases tend to be lower margin versus a construction phase. And if you have a good part of your backlog in engineering and procurement, you could sort of bridge that gap on how you get to the 4% margin.

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Juan Lladó Arburúa, Técnicas Reunidas, S.A. - First Vice Chairman of the Board [21]

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Lillian, maybe we have confused you with all these presentations. But I think -- let me clarify a little bit. I think it is just other way around. I mean when you have -- on construction, because of the crisis, because of difficulties, because of the size, because of the difficulty on the late supplies on a crisis period because of the quality of subcontractors in the crisis period, all the delivery and construction, it has practically no margin, and that's why it is hurting us. It has marginal extra cost, not margins. That's what I'm saying that we have a very imbalanced backlog. And we have imbalanced backlog because we have to deliver and to deliver well because that's what we get paid for, deliver well to our customers, deliver well to Aramco, deliver well to our KNPC in Kuwait, and we're doing so, it's easier for you to check, delivering very well to Saudi Arabia despite of difficulties, and that translates into awards.

When awards come, then we have and it has to come, and we already have good awards, then we have an imbalanced backlog. And the imbalanced backlog means that we have practically nothing as the backlog is what is left on construction because if our projects are above 90%, which is marginal extra cost. Engineering, which is just starting, and the way we account for engineering give us very little margin. If we have very little margin because we -- not because it hasn't got no margin, just because it gives us very little turnover. I mean engineering is about 10% of the value of the job, 10% to 15%. So when you start the job, the turnover is engineering. And engineering, you have to account for the margin of the whole project. Not the money that you make on engineering, it's just accounting methods. And margins start to come when you have a more balanced backlog, when the backlog moves from engineering to procurement and you have less weight on construction.

So having gone through a crisis, that crisis means that we had to deliver big jobs and had cancellations. And having survived the crisis with new awards, new healthy (inaudible) we have today is a recovery backlog, which is good, which is healthy, but it's imbalanced. A lot of engineering, finalizing jobs on construction and early procurement. And the reality is, the margin is, when we do engineering and obviously when we do procurement. So we have to wait a little bit for the jobs awarded to us last -- over the last -- as I said before, over the last quarter or last year and over this first half of the year to come into a procurement phase, so will translate into more turnover and more margins. That's why when you ask me, if I feel comfortable on guidance, my answer is yes.

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Lillian Starke, Morgan Stanley, Research Division - Research Associate [22]

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Okay, perfect. Very clear. And then if I could ask an additional question. I was just wondering on the slide where you have the awards over the last 10 months. I was wondering if the second combined cycle plant, is that already included in backlog or maybe that could come in the second half of the year?

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Juan Lladó Arburúa, Técnicas Reunidas, S.A. - First Vice Chairman of the Board [23]

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It's not. it's not. We have been selected. We're working with the customer. We didn't bake here little, little things because we have been selected to start up, but it's not included in the backlog, if that's the answer -- if that's the question. And you would get the backlog second half of the year.

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Operator [24]

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The next question comes from Kevin Roger from Kepler.

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Kevin Roger, Kepler Cheuvreux, Research Division - Research Analyst [25]

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Sorry, all the questions have been answered so that's fine for me.

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Operator [26]

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The next question comes from Nuno Estácio from Haitong Bank.

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Nuno Estácio, Haitong Bank S.A., Research Division - Equity Research Analyst [27]

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Just a quick question coming back on the theme of the margins. So over the last couple of quarters, your margin has been quite weak because of this construction of the projects you are delivering now, okay. I understand that. But my question is, how confident and what have you learned from all these things that you are delivering now that this won't be repeated on the current backlog. So what is your confidence? And what have you learned? And what have you done differently in the way that you have chosen your subcontractors, the way that you have bidded to avoid that -- this in 2 years' time or 3 years' time when we are delivering this backlog, this situation does not repeat again?

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Juan Lladó Arburúa, Técnicas Reunidas, S.A. - First Vice Chairman of the Board [28]

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Thank you, Nuno. It's not only what we've learned it's -- because I think it's a very good question and it is what we're learning. Let me start that now, I didn't want to do it 2 years ago in the middle of the crisis, I didn't want to do it a year ago, but now we have 2 consultants here, sometimes I'm critical of consultants because they become not (inaudible) use, but that seems very important to review with us how we can become more efficient and to try to identify with us all sort of lessons learned. Cost savings is one consultant and process of production and delivery is another different consultant, both of them are working together.

So there are some things that I think I have already learned by myself. I think way of subcontracting has to be sometimes different. We have to look for stronger contractors and do more vertical subcontracting instead of horizontal. Vertical means look for a very strong subcontractor despite of being more expensive, that goes from the first pilot to the flat table. Horizontal can be cheaper, that means the guy does the first pilot and another guy does the electrical system, a very small one. Probably in this new market, when some of the contractors have recovered, many of them were in very bad shape. We have to go back as we were doing before to strong vertical contracting. We have learned as well that in some countries, we don't want to assume construction risk and we know why. I don't want to get into details, and we would, despite of the attractiveness of the offer, we would not take it. We'll try to convince customers of different ways of tackling the job. That's also a second lesson, a very important second lesson.

I do believe that engineering has to be extremely good quality. I don't believe and I don't trust low quality engineering, trying to save money on third countries. Sometimes when market goes up, everybody says, well, I have resources all over India here and there. I think that quality of engineering has a very -- has 2 years later an impact on construction, and any bend on construction is a very expensive penalty that we have to pay. Those are all the things that over the last 4, 5 years of difficult business we've learned. But it's also true that we have hired today. We make very little noise when we talk about efficiency and cost savings and whatever. But there's no doubt, we're doing it with consultants, that we have to review what are the lessons learned over the last 3 years and what we can do better. We didn't do it 2 years ago. 2 years ago, we had some urgent problems to solve, and now we have a business to manage. And I feel more comfortable and I'm confident we'll do well. Is that -- I don't know whether I have answered you, Nuno.

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Nuno Estácio, Haitong Bank S.A., Research Division - Equity Research Analyst [29]

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Yes. Yes. And in terms of contingencies because well, at the end of the day these are all contingencies, have you increased the level of contingencies you put when you bid for a project or that has remained essentially stable and what you need is to be more on top of things and take a look of these points that you mentioned?

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Juan Lladó Arburúa, Técnicas Reunidas, S.A. - First Vice Chairman of the Board [30]

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I mean we're in a market where we have to be competitive. When you are on a crisis market, you do believe that you -- you think you're putting contingencies at the end of the day, you put on contingencies that translates into a direct cost right away. When that is -- when the market is bigger, today it's a bigger market, when the size of the pie is bigger and the size is much bigger today, that allows you to be a bit more comfortable on the bidding process and allow you to be slightly more profitable on the price. And a lot more profitable -- more comfortable on the contingencies. Those contingencies that we put today are real contingencies. The contingencies that would allow us to keep and protect the margin towards the end of the project. When you're managing the business under crisis and you need to award, sometimes you believe your own ambition. And although you think if you put in a 5%, 6% contingency on procurement or engineer or on construction, 6 months later, you realize that, that contingency is already a real cost. I mean we're increasing contingencies, but we're not increasing contingencies, we're increasing the quality of the contingency because the market is -- allow us to be a bit more comfortable than it had 2 or 3 years ago, definitely.

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Operator [31]

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The next question comes from Alvaro Lenze from Alantra Equities.

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Alvaro Lenze Julia, Alantra Equities Sociedad de Valores, S.A., Research Division - Research Analyst [32]

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And please allow me to return to the stage of development of the pipeline. Because in this quarter, you did not provide the slide where you split the pipeline by a degree of development. But given the high increase quarter-on-quarter in revenues, I understand that a lot of the contracts that were in engineering phase must have moved along the development projects. But given the low margins that would imply that they would have gone directly to the construction phase. So since you are leaving the revenue guidance unchanged, I understand that next quarters are going to go back, so I don't understand if this is just a calendar issue that has implied some revenue recognition in this quarter due to some of the contracts that are still in the engineering phase that have advanced enough so that you have reached a milestone or are these contracts that have gone from engineering to construction? Or how is the split in half 1 between -- of the backlog in terms of engineering, construction and procurement? If you can provide this information so we can have a better understanding of how the revenue could evolve in Q3 and Q4.

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Juan Lladó Arburúa, Técnicas Reunidas, S.A. - First Vice Chairman of the Board [33]

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Okay, Alvaro. Let me start by the end. I mean the revenue at the end of the year, Q3 and Q4 should evolve positively as we move forward, as set, with the new awards. But if you do a quick analysis of our backlog, which is just a very quick analysis of the backlog, I've already presented to you that over the last 10 months, and 10 months is nothing, we have been awarded more than $7 billion (sic) [EUR 7 billion] of new jobs. And some of them, EUR 3 billion has been awarded, which is 2 -- 3 weeks ago. So that -- all of that is in engineering stage. Another very large job was awarded. It came into force towards the end of July of last year. That continues in the engineering stage.

So -- and at the same time, over the last year and continued this year, a very large percentage of our business, which is not shown in the backlog because they're jobs that are 90% completed. They are in construction stage. So unfortunately, it takes a while to move this big backlog. The good news is that we have a good backlog. The good news is that ADNOC, Exxon, GE and Aramco has awarded, all of them together, $7 billion -- EUR 7 billion of new jobs. The bad news is we're in a hurry to have margins, is that they are being launched nicely, correctly. We're trying to accelerate because it's good for us and it's good for them, the engineering phase. But we're still not on procurement phase. It's going to take a few months. And those it'll be final construction and new procurement, and will start to compensate one with the other and translate into margins towards the end of the year, but it's not a mathematical algorithm. It has to go project by project and engineering by engineering on the project and delivery, one after the other of the 2 of the $1 billion jobs that we are delivering, and delivering successfully. And it's not successful because I've said it is successful because our customers are awarding new jobs to us. But it's not -- I haven't done the split. I have seen in the quarter, it's very difficult. You said, it gives you very little message to try to make a split on engineering and procurement. But a big chunk -- again, the big chunk of the backlog, a very big chunk has just started, which is good, not good enough to have good margins, but good to have a very good future.

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Alvaro Lenze Julia, Alantra Equities Sociedad de Valores, S.A., Research Division - Research Analyst [34]

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Okay. If I may...

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Juan Lladó Arburúa, Técnicas Reunidas, S.A. - First Vice Chairman of the Board [35]

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I don't know whether I have answered your...

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Alvaro Lenze Julia, Alantra Equities Sociedad de Valores, S.A., Research Division - Research Analyst [36]

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Yes, yes. But if I may, a follow-up. I understand that when you increase the weight of procurement, your margins will go up, but if you are doing so, I would also expect revenues to go up. And given that you are maintaining your revenue guidance flat, that means that on a -- I mean if I took Q2 revenues and move that forward for the rest of the year and of the EUR 900 million revenues you had in Q1, that would imply a significant increase in revenues for 2019 over 2018. So my question is, I understand that the change in mix should allow for higher margins, but if that was the case, should -- with the revenues that you have released up-to-date should not that imply also higher revenues?

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Juan Lladó Arburúa, Técnicas Reunidas, S.A. - First Vice Chairman of the Board [37]

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Alvaro, when you start a job, it takes more than 40 months to deliver and is highly complex. And you analyze one by one the jobs that had been awarded to us. None of them is just a simple job that is going to be delivered in 24 months. All of them go above the 40 months. The engineering stage, the launching of the project takes a while. Then -- it takes a while. That's why our guidance for the year in terms of revenue cannot be very high. It cannot be very high because to procure well, you have to define well what you have to procure and it takes a while. And -- but as you definitely see a growth in revenue in 2020, the bulk of the business will come in terms of -- in '20. The bulk of construction is finishing this year and the new awards have just came all together -- not all together, but over the last 10 months, over the last -- this year and the end of the last one and as well as some of the delays of 2017 came in towards the end of 2018. So all of that is starting, and it takes a while.

It's not engineering phase. It takes a while. You don't start -- maybe you buy bulk material just a little bit to launch construction, but all the equipment, it takes a while to get defined and bought -- and when you buy, you don't take -- you don't count to 100% of the equipment. You -- I mean you start accounting for the equipment as it gets fabricated. So it takes a little while to be shown in the balance sheet. There are 40 months jobs, 43, 47, 41, they are very long ones, which is good in terms [size] as well, positive in terms of -- on visibility.

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Operator [38]

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The next question comes from Luis de Toledo from BBVA.

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Luis de Toledo, BBVA Research SA - Chief Analyst of Oil and Materials [39]

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Just a couple of questions from me on my side. The first one, referring to the commentary you make on bidding more cost inclusive schemes. Is this something that, I mean, you relate with better market conditions. In the past, you referred that this type of contract was something that customers wanted in bull market in order to get the project starting rapidly. I don't know if it's a strategic turn or a reaction to market conditions. And the second question would be, in this sense, if you would expect the same normalized margins in lump sum turnkey projects or cash plus projects going forward. Basically, I want to know if this cost plus priority is something that will be significant on the FEED projects that you have currently participating.

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Juan Lladó Arburúa, Técnicas Reunidas, S.A. - First Vice Chairman of the Board [40]

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Okay, Luis. I mean we are perceived and we're very good in the market because we're a very good EPC market player. We're very good, and we've been a quality EPC player, and we're not going to abandon that and the thing is on the bull market, as the market grows, I mean, we're moving little by little to do more FEEDs, and do more FEEDs, that means to do more engineering. To do more FEEDs has 2 advantages to us. First of all, it is very technical, it has good margins and very important, it places us, depending on the customer, in a good position to then learn more about the project, and if customer allow us, to bid the EPC, which means that maybe we know too much when we bid the EPC, but definitely, we are making a bid for far less risk. That's the case of Exxon. And there are some of the cases, some of the jobs we're doing in Russia. And that would be the case when it comes into some of the large FEED we're doing in Emirates when it comes into the bidding EPC phase.

So that also has to do with the TR's franchise, which is gaining credibility on FEEDs and not only on EPC, which is very important, and we're working very hard on it because it allow us not only to make money, it allows us to work close to the customer and de-risk the EPC, which is very important. And if you look into our awards, every year, we have more and more FEEDs and more and more FEEDs with open book conversions and cost plus structures. In some countries, as I said before, that we never want to do construction, we're working with the customers on schemes by which we do engineering, we do the procurement, and we find ways to share in the construction risk. And that has to do with 2 things. First of all, lessons learned. Secondly, stronger franchise. Customers allow you to do so and invite you to do so. And third and probably the most important is bull market. It's got to be a market for us to do so and the market is there.

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Luis de Toledo, BBVA Research SA - Chief Analyst of Oil and Materials [41]

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Perfect. And referring to margins, do you expect the same normalized margins in the projects that do not change significantly the profile of future profitability?

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Juan Lladó Arburúa, Técnicas Reunidas, S.A. - First Vice Chairman of the Board [42]

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I do believe that if we have to move, then we will move into normalized margins. I mean we've gone through difficult years. I think we've managed those difficult years quite nicely, I have to say. I mean we've never been -- we've done okay. And that there is -- having done okay, that means we've delivered nicely and customers are awarding new job to us, which has to translate and will translate into normalized EPC plus cost plus, plus FEED normalized margins.

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Operator [43]

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The next question comes from Mick Pickup from Barclays.

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Michael Brennan Pickup, Barclays Bank PLC, Research Division - MD & Senior European Oilfield Services Analyst [44]

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Sorry, Juan, I think, part of it was just answered, but can I just clarify a few things. So in your release, you noted a lot of FEEDs to this. Are these possibility of converting into EPC at some stage? I know once upon a time it used to preclude you from going to EPC. But are you saying that these are FEEDs that could become de-risked EPC at some point?

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Juan Lladó Arburúa, Técnicas Reunidas, S.A. - First Vice Chairman of the Board [45]

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Yes. Most of -- yes, Mick, most of the FEEDs that we have put in the release, and I do believe all of them allow us to -- because sometimes customers do not allow you to set free. In our cases, those are FEEDs that customers hire for us to bid the EPC. So which is -- the answer is, yes, I think when you're doing a FEED and you're doing a FEED at for instance, in Russia or in the Emirates, I think you do the EPC then with far more knowledge and less risk and the probability of making mistakes on the bid are -- is much lower. And being good at EPC, so that is a risky business, I mean FEED plus EPC is an ideal job.

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Michael Brennan Pickup, Barclays Bank PLC, Research Division - MD & Senior European Oilfield Services Analyst [46]

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Okay. And then second one, just -- it's a follow-up. You mentioned a word that I haven't heard for about 4 or 5 years. So given the -- some of the A&C contractors have won some nominal amounts of LNG work, and you've had a cracking 10 months of winning awards. Do you think you're in a bull market now? Or do you think there's a potential of a bull market? I haven't heard anybody use that word bull market since 2013.

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Juan Lladó Arburúa, Técnicas Reunidas, S.A. - First Vice Chairman of the Board [47]

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I don't know, maybe today now it being close to August and wanted to on holidays and a bit too optimistic. But I think the -- I think we're in a bull market. I think the market is turning very bullish on the investment side. I think the investors, they want to invest. Investments are being sanctioned and jobs have been awarded. And that hasn't happened to us for the last 4, 5 years. So I don't know, whether it's a big bull or it is a little cow, but definitely it has horns.

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Michael Brennan Pickup, Barclays Bank PLC, Research Division - MD & Senior European Oilfield Services Analyst [48]

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And just on that, obviously, things tend to often derail, it's been project financing in the past, it's been projects going to rebid, what gives you the confidence that the current tendering pipeline is, say, is not going to move? Things always seem to be a little bit later than we thought previously.

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Juan Lladó Arburúa, Técnicas Reunidas, S.A. - First Vice Chairman of the Board [49]

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You mean moving?

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Michael Brennan Pickup, Barclays Bank PLC, Research Division - MD & Senior European Oilfield Services Analyst [50]

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Yes, they tend to always drift away from you, let's put it that way.

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Juan Lladó Arburúa, Técnicas Reunidas, S.A. - First Vice Chairman of the Board [51]

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I mean I do believe the thing is, it has to do with bidding capacity at the end of the day. But I think the piping -- the pipeline is moving forward and it is moving sort of -- but also we have to find the way of where to bid, as to whom to bid, with whom to rebid and who should be our new customers. We're now going to be very creative, and we're going to be selective. If the market which gives us the opportunity to grow, definitely we'll grow because I think we know how to grow. We've learned how to grow in the past. We just learned how to manage a crisis. And I think both together allow us to grow even better. So if the market will give us the opportunity to grow, we'll grow, but we're going to grow being selective with the customers we want to work for and in the countries that will give us an opportunity to grow.

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Operator [52]

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Thank you. Ladies and gentlemen, there are no further questions in the conference call. I now give back the floor to the company. Thank you.

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Juan Lladó Arburúa, Técnicas Reunidas, S.A. - First Vice Chairman of the Board [53]

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Okay. Thank you very much all of you. It's been good talking to you. If some of you can take a few days off, take it. And if some of you cannot take it, escape from the office and take it as well. It's time to relax, at least for a couple of weeks. And thank you very much, again, and I'll see you, I guess, in the next quarter presentation.